Critical Analysis of Key Recommendations of Company Law Committee to amend the Companies Act, 2013

In September 2019, the Government had formed the Company Law Committee (‘CLC’) to further decriminalise the provisions of the Companies Act, 2013 (‘the Act’) based on their gravity and to take other related measures to provide further ‘ease of living for corporates’ in the country. The CLC noted the progress made consequent to the Companies (Amendment) Act, 2019.

The CLC adopted a principle-based approach to further remove criminality, in case of defaults which can be determined objectively and which, otherwise, lack the element of fraud or do not involve larger public interest. In some cases, the CLC also explored and recommended alternative methods of imposing sanctions. This article is a critical analysis of the important recommendations of the CLC:

• Re-categorising certain compoundable offences in in-house adjudication framework: According to the recommendation the said defaults would be subject to a ‘penalty’ levied by an ‘Adjudicating Officer’. The quantum of penalties recommended by the CLC is lower than the quantum of fines presently provided in the Act. By this proposal, the Registrar of Companies will have the power to issue show-cause notices and impose penalties for the non-compliances. For implementing the adjudication process under the Act, the Govt. has introduced an online portal – compliance monitoring system – https://mcacms.gov.in/#/ . The Govt. has not explained the rationale of selecting the cases for adjudication. However, in the Rules, the Govt. has provided illustrative factors to be considered by the Adjudicating Officer for imposing a penalty for the said non-compliances;

• Omitting certain ‘compoundable offences’ & reducing the quantum of penalties: The CLC has also recommended omitting, altogether, 7 compoundable offences; limiting punishment for 11 compoundable offences to only fine (by removing the provision for imprisonment) and recommending that 5 offences be dealt under alternative frameworks. The CLC has recommended reducing the quantum of penalties in respect of 6 provisions, which were shifted to the in-house adjudication framework. The objective of the Govt. seems to be that the non-compliance be dealt with by in-house adjudication and the company would not be required invests its time in the compounding of certain offences. Presently, the Adjudication process seems to be a time-bound process with a provision to appeal to the MCA, Regional Director;

• Exceptions to the definition of ‘listed company’: It has been proposed that certain class of companies be excluded from the definition of ‘listed company’, mainly for the listing of debt securities. However, this proposal shall be consulted with SEBI;

• Clarity on Trial Court’s jurisdiction: CLC has recommended clarifying the Trial Court’s jurisdiction on the basis of place of commission of offence u/s 452 of the Act, for wrongful withholding of property of a company by its officers/employees;

• NCLAT benches: CLC has proposed benches of the National Company Law Appellate Tribunal (‘NCLAT’). The NCLAT Benches in the 4 regions (at least) would be quite helpful, economical for the corporates and practicing professionals. The CLC noted that due to the variety and amount of matters that are to be dealt with by the NCLAT, the CLC agreed that creation of specialised benches of the NCLAT should be enabled. It was also noted that benches of the NCLAT, in places other than New Delhi, will aid enabling smoother access for litigants and parties to litigation. Benches of NCLAT would also assist in speedy disposal of IBC matters;

• Remuneration to NEDs in case of inadequate profits: According to the extant provisions of the Act, there is no provision for payment of remuneration to non-executive directors in case of loss or inadequate profits. Schedule V to the Act provides for payment of remuneration to only Managing Directors, Managers and Whole-time directors. CLC has recommended that necessary provisions of the Act shall be amended for allowing payment of adequate remuneration to non-executive directors in case of inadequacy of profits. CLC has recommended to align the proposed provisions with the extant provisions for remuneration to executive directors in such cases. Presently, in case of inadequate profits, the amount of remuneration to Managing Directors, Managers and Whole-time directors depends upon the effective capital of the company. Here, the ‘effective capital’ means aggregate of the paid-up share capital amount, if any, for the time being standing to the credit of share premium account; reserves and surplus (excluding revaluation reserve); long-term loans and deposits repayable after 1 year (excluding working capital loans, over drafts, interest due on loans unless funded, bank guarantee, etc., and other short-term arrangements) as reduced by the aggregate of any investments (except in case of investment by an investment company whose principal business is acquisition of shares, stock, debentures or other securities), accumulated losses and preliminary expenses not written off.

• Enhancing the scope of ‘lower penalties’: As per extant provisions of Section 446B of the Act, if OPC or Small Company fails to comply with the provisions of sub-section (5) of section 92, sub-section (2) of section 117 or sub-section (3) of section 137 of the Act, such company and officer in default of such company shall be liable to a penalty which shall not be more than one half of the specified penalty. CLC has recommended to extend the applicability of the provisions of section 446B of the Act to: (a) All provisions which attract monetary penalties under the Act and (b) Extending the benefit to Producer Companies and start-ups.

• Reducing timelines for rights issues: Pursuant to the extant provisions of the Act, the rights offer shall be made by notice specifying the number of shares offered and limiting a time not being less than 15 days and not exceeding 30 days from the date of the offer within which the offer, if not accepted, shall be deemed to have been declined. CLC has recommended to reduce the timelines for expediting rights issues process (u/s 62 of the Act). If the recommendation is implemented, the beneficiaries would be private companies and closely held public companies;

• Certain exemption to NBFCs: In consultation with RBI, CLC has recommended to extend the exemptions from filing of certain resolutions of certain classes of NBFCs under Section 117 of the Act;

• CSR: As per the extant provisions, section 135 of the Act (relating to ‘Corporate Social Responsibility’), every company having Net-worth of Rs. 500 crore or more, or Turnover of Rs. 1,000 crore or more or Net-profit of Rs. 5 crore or more during the immediately preceding financial year shall constitute CSR Committee of the Board. CLC has recommend to provide powers to the Govt. for enhancing the thresholds which trigger applicability of CSR provisions;

• Non-levy of penalties, in certain cases: CLC has recommended that the penalty for delay shall not be levied for filing the annual returns and financial statements in certain cases. The objective of this suggestion would be that the related e-Forms would be filed late due to some technical errors or natural calamity. Also, there could some genuine cases for not filing annual returns / financial statements in certain cases;

In addition to the above recommendations, CLC felt that wider consultation would be necessary and recommended that certain issues could be taken up in due course, at a later stage. Such issues include: (a) Providing for appeal against the orders of Regional Directors before the NCLT after due examination. Presently, there is no mechanism to appeal to any authority beyond Regional Director, (b) Exempting certain Private Placement requirements for Qualified Institutional Placements (QIPs), (c) Reviewing provisions on disqualification of directors, (d) Reviewing provisions in respect of debarment of audit firms.

Concluding remarks: MCA had prescribed the terms of reference of CLC by its order dated September 18, 2019. The recommendations made by the CLC (as discussed above) were part of the terms of reference. However, according to the terms of reference, the CLC has not examined the feasibility of introducing settlement mechanism under the Act. CLC has also not commented on the existing framework under the LLP Act, 2008 and suggested measures to plug the gaps, if any. CLC has not commented on the specific provisions under the Act and LLP Act. 2008 which are required to be amended to bring about greater ease of living for corporate stakeholders.

The focus of CLC was entirely on revamping the offences, penalties and prosecution related provisions under the Act. However, the CLC ought to have addressed some important compliance provisions of the Act, which includes: (i) Provisions relating to significant beneficial owners (‘SBO’), the apparent conflict of Section 90 of the Act with SBO Rules, (ii) Easing compliances for private placement of securities under section 42 of the Act, (iii) Disclosure of interest by directors (Section 184 of the Act) shall be aligned with Section 299 of Cos. Act, 1956, (iv) Clarity on ‘ordinary course of business’ for RPTs, (v) Guidance for ‘principal business activity’ for ‘loans to directors’ under section 185 of the Act, (vi) Clarity on exemptions to Pvt. Cos. (given by MCA by June 5, 2015 Notification read with Cos. (Amendment) Act, 2017), (vii) Apparent conflict in Rules & Act, at several occasions. These would have definitely taken into consideration the ‘ease of living for corporates’ in the country (the ultimate objective of the CLC, 2019). In my view, the suggested amendments are not adequate and therefore, the Companies Act is set for another round of amendments!

Gaurav N. Pingle is a Practising Company Secretary from Pune. He handles various assignments of Secretarial Audits, Due Diligence, Quarterly compliance audit of listed companies, routine compliance (under Companies Act & FEMA) for private companies, wholly-owned subsidiaries, joint venture companies.